Business context and reporting period
Mandalay Digital Group, Inc. (the registrant; operating through Digital Turbine subsidiaries) filed this Form 10-Q for the quarter ended June 30, 2014, its fiscal first quarter. The company provides mobile content, application management, discovery, and billing solutions to wireless carriers and OEMs, including DT Ignite, DT IQ, DT Content, and DT Pay.
Twistbox was sold in February 2014 and is presented as a discontinued operation. The filing’s comparative results are for the three months ended June 30, 2013.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statements report in thousands unless noted.
| Metric | Q1 FY2015 | Q1 FY2014 | Change/comment |
|---|---|---|---|
| Revenue | $5.554 million | $4.783 million | Up 16.1% |
| Gross profit / margin | $1.414 million / 25.5% | $1.666 million / 34.8% | Gross profit down 15.1%; margin contracted 9.3 percentage points |
| Operating expenses | $6.094 million | $5.763 million | Up 5.7% |
| Operating loss | $(4.680) million | $(4.097) million | Loss widened |
| Net loss from continuing operations | $(4.610) million | $(5.423) million | Loss narrowed 15.0%, helped by much lower interest and other expense |
| Total net loss | $(4.610) million | $(5.686) million | Prior period included discontinued-operation loss |
| Basic and diluted loss per share | $(0.12) | $(0.30) | Weighted-average shares rose 98.4%, to 37.424 million |
Revenue growth reflected a fuller contribution from DT APAC than in the prior-year quarter and growth in billing revenue. Billing revenue increased 36.2% to $2.628 million; music content revenue increased 42.6% to $1.108 million. Services revenue fell 64.8% to $0.242 million. Management attributed lower gross margin principally to sales mix, including higher billing and lower services revenue; license fees rose 39.9% to $3.796 million.
Cash and cash equivalents were $18.687 million at June 30, 2014, down from $21.805 million at March 31, 2014. Operating activities used $3.135 million, versus $1.594 million in the prior-year quarter. Investing activities used $0.022 million; financing activities provided no cash. Working capital was $15.3 million, compared with $15.6 million at March 31, 2014.
Total assets were $38.545 million and total liabilities $9.084 million at quarter-end. Current liabilities were $9.084 million. The balance sheet shows no conventional borrowing balance; a $0.238 million contingent liability at March 31 was settled during the quarter. The settlement also involved 50,000 shares valued at $0.188 million and an additional $0.060 million payable at the company’s election in cash or shares.
Material changes versus the prior comparable period
- Revenue increased, but higher content license costs and mix shift reduced gross profit and gross margin.
- Product development expense rose 23.4% to $1.959 million and sales and marketing expense rose 104.0% to $0.761 million. General and administrative expense declined 11.3% to $3.374 million, mainly due to lower stock compensation and legal expense, partly offset by increased headcount.
- Interest and other expense was $0.003 million of income in the current quarter, compared with $1.440 million of expense in the prior-year quarter; the filing attributes the prior-period expense largely to debt-related items.
- Cash used in operating activities increased by $1.541 million year over year. The prior-year quarter included acquisition-related investing and $2.700 million of equity proceeds; the current quarter had neither.
Outlook, management commentary, and risks
- Management stated that existing cash should fund planned operations for at least the next 12 months. The company was not yet cash-flow positive and expected to rely primarily on cash on hand; additional financing may be needed for acquisitions or licensing, and may not be available on acceptable terms.
- No specific revenue, earnings, or cash-flow guidance was provided. Management expects operating expenses to increase in absolute dollars as the business grows, while expecting them to decline as a percentage of revenue. Revenue and profitability depend on product mix, carrier and publisher relationships, content and application sales, CPI advertising, and expansion into additional markets.
- Management cited possible seasonality, including summer softness in Europe and holiday-related effects that may fall in the March quarter. Revenue may also be affected by carrier agreements, portal traffic, handset launches, and how carriers promote content.
- Customer concentration is significant: two customers represented 64.4% of gross revenue in the quarter and approximately 50.8% and 11.2% of gross receivables at June 30. The company also depends on carrier reporting and estimates some unfinalized revenue, which may later be adjusted.
- Management reported disclosure controls and internal control over financial reporting were ineffective at June 30 because of material weaknesses in financial close and reporting resources, systems, and consolidation procedures. Remediation included implementing ERP software and reallocating accounting responsibilities; completion was expected during fiscal 2015. Management stated it did not believe issued financial statements contained a material misstatement, but the weaknesses could permit one.
- A legal matter in Israel involving alleged mobile-call overcharges remains pending on appeal. The company says it has no contractual relationship with the principal defendant, believes liability is remote, and has accrued no liability. Management also reports no other claims expected to be material.
- The company recorded no goodwill or intangible-asset impairment in the quarter. Finalizing the DT APAC purchase-price allocation shifted $1.472 million from intangibles to goodwill. The company maintains a full valuation allowance against net deferred tax assets; utilization of tax-loss carryforwards may be limited by ownership-change rules.
Important facts for investors to verify
- Whether revenue growth can be sustained while restoring gross margin, given higher license fees and the changing mix of billing, services, and content.
- Cash burn and the adequacy of the stated 12-month liquidity runway, particularly if growth, acquisitions, or licensing require additional funding.
- Progress and effectiveness of the planned internal-control remediation, and whether future filings report the material weaknesses resolved.
- Exposure to the two major customers, carrier reporting estimates, and any subsequent revenue or receivables adjustments.
- Final resolution and any payment or share-release obligations under the Logia settlement, and developments in the pending Israeli litigation.